Bonds, shares rally as RBI cuts inflation call

By Abhirup Roy and Jessica Kuruthukulangara

MUMBAI/BENGALURU (Reuters) - Indian bonds and equities rallied on Thursday after the Reserve Bank of India cut its inflation view amid easing price pressures, even as it stuck to its "neutral" stance and kept policy rates on hold.

Markets cheered the reduced chances of a rate hike in the near future as the monetary policy committee of the RBI sounded less hawkish than some had expected.

Concerns around higher inflation have dissipated quite a bit in recent weeks after a slump in vegetable prices following the spike in farm production. This is expected to keep price pressures at bay for the next few months.

The RBI substantially lowered its April-September inflation projection to 4.7-5.1 percent from a previous range of 5.1-5.6 percent that it had released in February.

The sharp cut led to the 10-year benchmark bond yield falling by 16 basis points to close at 7.13 percent.

"The policy indicates inflation numbers could undershoot market expectations," Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank Of India said.

"My sense is that this will augur well for financial markets, which have been plagued by uncertainties. We are expecting a prolonged pause with a tilt towards accommodation."

The Nifty closed up 1.94 percent at 10,325.15, while the Sensex ended 1.75 percent higher at 33,596.80.

Both indexes extended gains, helped by RBI's less hawkish inflation comments and better-than-expected growth projections that resulted in some short-covering in the markets, according to market experts.

"The market effectively is reading this as RBI is pretty much on an extended pause," said R Sivakumar, head of fixed income, Axis Mutual Fund.

The RBI projected economic growth of 7.4 percent for the current fiscal year that began on April 1, saying "several factors are expected to accelerate the pace of activity."

The rupee strengthened to as much as 64.9450 to the dollar following an initial drop on the RBI's announcement and ended at 64.9650.

(Reporting by Abhirup Roy in Mumbai and Jessica Kuruthukulangara in Bengaluru, Editing by Euan Rocha and Sherry Jacob-Phillips)